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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21937
CERUS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 68-0262011
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
2525 STANWELL DR., SUITE 300
CONCORD, CALIFORNIA 94520
(Address of principal executive offices, including zip code)
(925) 603-9071
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of July 31, 1998 there were 9,408,295 shares of the Registrant's
Common Stock outstanding.
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CERUS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
THREE MONTHS ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE NO
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets - June 30, 1998 and December 31, 1997 3
Condensed Statements of Operations - Three and six months
ended June 30, 1998 and 1997 4
Condensed Statements of Cash Flows - Six months ended
June 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
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PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
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SIGNATURES 18
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PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
CERUS CORPORATION
CONDENSED BALANCE SHEETS
UNAUDITED
(in Thousands)
June 30, December 31,
1998 1997
------- -------
Assets
Current assets:
Cash and cash equivalents $ 5,189 $11,604
Short-term investments 12,903 9,977
Accounts receivable from a related party 5 4,376
Other current assets 303 214
------- -------
Total current assets 18,400 26,171
Furniture and equipment, net of depreciation 871 1,032
Other assets 91 112
------- -------
Total assets $19,362 $27,315
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,058 $ 1,299
Accrued expenses 4,412 3,428
Current portion of capital lease obligations 50 70
------- -------
Total current liabilities 5,520 4,797
Long-term note payable to a related party 8,300 --
Capital lease obligations, less current portion 21 43
Total stockholders' equity 5,521 22,475
------- -------
Total liabilities and stockholders' equity $19,362 $27,315
======= =======
See notes to condensed financial statements
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CERUS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
(in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenue:
Licenses, milestones and development
funding from a related party $ 578 $ 971 $ 2,004 $ 1,846
Government grants 167 152 353 309
-------- -------- -------- --------
Total revenue 745 1,123 2,357 2,155
Operating expenses:
Research and development 13,598 4,923 18,054 9,511
General and administrative 1,073 814 2,094 1,564
-------- -------- -------- --------
Total operating expenses 14,671 5,737 20,148 11,075
-------- -------- -------- --------
Loss from operations (13,926) (4,614) (17,791) (8,920)
Interest income, net 270 371 563 616
-------- -------- -------- --------
Net loss $(13,656) $( 4,243) $(17,228) $( 8,304)
======== ======== ======== ========
Net loss per share - basic and diluted $( 1.48) $( 0.48) $( 1.86) $( 1.07)
======== ======== ======== ========
Shares used in computing net loss per share
- basic and diluted 9,246 8,895 9,239 7,734
======== ======== ======== ========
See notes to condensed financial statements
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CERUS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(in Thousands)
Six Months Ended
June 30,
---------------------
1998 1997
-------- --------
Operating activities:
Net loss $(17,228) $ (8,304)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 296 281
Amortization of deferred compensation 53 100
Changes in operating assets and liabilities:
Accounts receivable from related party 4,371 (1,641)
Accounts payable to related party 8,300 --
Other current assets (89) (125)
Other assets 21 9
Accounts payable and accrued expenses 743 500
-------- --------
Net cash used in operating activities (3,533) (9,180)
Investing activities:
Purchases of furniture, equipment and leasehold improvements (135) (322)
Purchase of short-term investments (12,626) (28,833)
Maturities of short-term investments 9,700 13,000
-------- --------
Net cash used in investing activities (3,061) (16,155)
Financing activities:
Net proceeds from sale of preferred stock -- --
Proceeds from issuance of common stock 221 26,791
Deferred financing costs -- 969
Payments on notes receivable from shareholders -- 15
Payments on capital lease obligations (42) (63)
-------- --------
Net cash provided by financing activities 179 27,712
-------- --------
Net increase (decrease) in cash and cash equivalents (6,415) 2,377
Cash and cash equivalents, beginning of period 11,604 6,002
-------- --------
Cash and cash equivalents, end of period $ 5,189 $ 8,379
======== ========
See notes to condensed financial statements
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CERUS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements for Cerus Corporation
("the Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accrual adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for any future
period.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income, ("FAS 130"), and Statement No. 131, Disclosure
about Segments of an Enterprise and Related Information ("FAS 131"). FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components and is effective for the March and June 1998 quarters.
Implementation of this standard had no effect on reported net income. FAS 131
requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation and major customers and is
effective for 1998. Adoption of FAS 131 will not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K.
NOTE 2 - LOSS PER SHARE INFORMATION
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("FAS 128"), which was required to be adopted for the
period ended December 31, 1997. FAS 128 replaced the calculation of primary and
fully diluted net income (loss) per share with basic and diluted net income
(loss) per share. Unlike primary net income (loss) per share, basic net income
(loss) per share excludes any dilutive effects of options, warrants and
convertible securities.
In February 1998, Staff Accounting Bulletin No. 98 ("SAB 98") was issued which
amends prior Securities and Exchange Commission staff guidance primarily to give
effect to FAS 128. Topic 4.D of SAB 98 revises the instructions regarding the
dilutive effects of stock issued for consideration below the initial public
offering ("IPO") price or options and warrants to purchase common stock with
exercise prices below the IPO price, previously referred to as cheap stock. The
new guidance highlights the treatment that should be given to the dilutive
effect of common stock or options and warrants to purchase common stock issued
for nominal consideration.
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All net loss per share amounts for all periods have been presented, and where
appropriate, restated to conform to the FAS 128 and SAB 98 requirements. Common
stock equivalent shares from convertible preferred stock and from stock options
and warrants are not included as the effect is anti-dilutive.
NOTE 3 - LICENSING AGREEMENTS WITH BAXTER HEALTHCARE CORPORATION, A RELATED
PARTY OF THE COMPANY
In June 1998, the Company and Baxter Healthcare Corporation ("Baxter") entered
into a series of agreements modifying the terms of the companies' joint
development programs for pathogen inactivation systems for blood components used
for transfusion.
The Company and Baxter amended and restated their April 1996 red blood
cell/fresh frozen plasma ("FFP") agreement to modify the development funding,
revenue sharing and manufacturing, marketing and distribution responsibilities
of the parties for the FFP program. The amended and restated agreement provides
for Baxter and the Company generally to share red blood cell system development
costs equally, subject to mutually agreed budgets established from time to time.
The agreement also provides for a sharing of revenue from sales of red blood
cell inactivation system disposables after each party is reimbursed for its cost
of goods and a specified percentage allocation is retained by Baxter for
marketing and administrative expenses. The Company and Baxter equally funded the
FFP program development through December 31, 1997 after which time Baxter's
funding commitment for the FFP development program is limited to $1.2 million
payable in two equal installments in January 1999 and January 2000. The
agreement also provides for the Company to receive 75% and Baxter to receive 25%
of revenue from sales of FFP inactivation system disposables after each party is
reimbursed for its cost of goods and a specified percentage allocation is
retained by Baxter for marketing and administrative expenses. Baxter will be
responsible for manufacturing and marketing any FFP product, and will retain its
exclusive, worldwide distribution license. The agreement also provides for
Baxter to make a $2.0 million equity investment in the Company's Common Stock,
subject to the achievement of a specified milestone. The milestone-based
investment is priced at 120% of the market price of the Company's Common Stock
at the time of the investment. Baxter's former obligation to make a $5.0 million
milestone-based equity investment upon (a) the approval by the FDA to commence a
Phase 3 study in the United States or comparable approval in Europe under the
red cell program and (b) the approval by the FDA of an application to market
products developed under the platelet program or comparable approval in Europe
was eliminated.
The Company and Baxter also amended the December 1993 platelet agreement to
provide for Baxter to make a $5.0 million cash milestone payment to the Company
upon the approval by the FDA of an application to market products developed
under the platelet program or comparable approval in Europe or upon termination
of the platelet system development program. The amendment also provides for the
Company, beginning April 1, 1998, to fund $5.0 million that was previously
to be funded by Baxter.
The Company and Baxter also entered into an agreement under which the Company
will receive an additional 5.3% of the sharable revenue under the December 1993
platelet agreement in exchange for a payment to Baxter of $8.3 million on June
30, 1999. The Company has accrued for this payment as a long-term payable at
June 30, 1998 as the platelet systems are in the development stage and there can
be no guarantee that revenue will be realized under the agreement. The Company
may defer payment for up to twelve months under certain circumstances.
The Company and Baxter also entered into a preferred stock purchase agreement
under which Baxter agreed to purchase 5,000 shares of Series A Preferred Stock
("Series A") for an aggregate purchase price of $5.0 million. In July 1998,
Baxter purchased the Series A under the agreement.
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The Series A will convert into Cerus Common Stock upon the approval by the FDA
of an application to market products developed under the platelet program or
comparable approval in Europe or upon termination of the platelet system
development program. In the event of marketing approval, the Series A will
convert at 120% of market price at the time of conversion. In the event of
program termination, the Series A will convert at the market price at the time
of conversion. The Company has the right to redeem the Series A for $5.0 million
prior to conversion. In the event of a program termination, Baxter may require
the Company to redeem the Series A for $5.0 million.
The Company and Baxter also entered into a preferred stock purchase agreement
under which Baxter has agreed to purchase, at the Company's option, up to $9.5
million Series B Preferred Stock ("Series B"). The agreement provides that,
provided the Company has not completed cumulative equity financings with parties
other than Baxter in excess of $20 million by August 31, 1998, Baxter will
purchase, upon the Company's request, up to $9.5 million of Series B during the
period October 1, 1998 to September 30, 1999. Any purchase will be made at the
Company's sole option and may be made in a single tranche of $9.5 million or two
tranches of $5.0 million and $4.5 million. Each tranche becomes convertible to
Cerus Common Stock one year after purchase at the market price at the time of
the purchase. Upon the Company's completion of cumulative equity financings with
parties other than Baxter in excess of $20 million, the Series B will earn a
premium of 7% per annum for a period not to exceed one year. The Company has the
right to redeem the Series B prior to conversion for a payment to Baxter equal
to the purchase price.
NOTE 4 - RECLASSIFICATION OF PRIOR BALANCES
Certain balances in the June 30, 1997 financial statements have been
reclassified to conform to the current period financial statement presentation.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with the financial
statements and accompanying notes included herein and the audited financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K (the "10-K"). Operating results for any period are not necessarily
indicative of results that may occur in future periods.
Except for the historical information contained herein, this discussion includes
forward-looking statements that involve risks and uncertainties. When used
herein, the words "believe," "anticipate," "expect," "estimate" and similar
expressions are intended to identify such forward-looking statements. There can
be no assurance that these beliefs and expectations will prove to be correct.
Certain important factors could cause actual results to differ materially from
those discussed in such statements, including uncertainties associated with
preclinical and clinical testing and other factors discussed below and in the
10-K. The Company undertakes no obligation to update any of the forward-looking
statements contained herein to reflect any future events or developments.
OVERVIEW
Cerus Corporation is developing systems designed to improve the safety of blood
transfusions by inactivating infectious pathogens and inhibiting the leukocyte
(white blood cell) activity responsible for certain adverse immune and other
transfusion-related reactions in blood components used for transfusion (platelet
concentrates ("platelets"), fresh frozen plasma ("FFP"), and red blood cells).
The Company's platelet pathogen inactivation system is in a Phase 3 clinical
trial in Europe and a Phase 2 clinical trial in the United States. The Company's
FFP pathogen inactivation system is in Phase 2 clinical trials in the United
States and its red blood cell pathogen inactivation system has been approved to
commence Phase 1 clinical trials in the United States.
Since its inception in 1991, the Company's has devoted substantially all of its
efforts and resources to the research, development and clinical testing of
techniques and systems for inactivating pathogens in transfusion blood
components. The Company has been unprofitable since inception and, as of June
30, 1998, had an accumulated deficit of approximately $52.1 million. All of the
Company's planned pathogen inactivation systems are in the research and
development stage. The Company will be required to conduct significant research,
development, preclinical and clinical evaluation and regulatory compliance
activities on these products that, together with anticipated general and
administrative expenses, are expected to result in substantial losses at least
until after commercialization of its products under development. The Company's
ability to achieve a profitable level of operations in the future will depend on
its ability to successfully complete development, obtain regulatory approvals
and achieve market acceptance of its pathogen inactivation systems. There can be
no assurance that the Company will ever achieve a profitable level of
operations. Further, under the agreements discussed below, a significant portion
of the Company's development funding is provided by Baxter Healthcare
Corporation ("Baxter") based on an annual budgeting process. There can be no
assurance that these agreements will not be modified or terminated as provided
for in the agreements.
Agreement with Baxter for the development of pathogen inactivation systems for
platelets. In December 1993, the Company entered into a development and
commercialization agreement with Baxter to develop a system for inactivation of
pathogens in platelets used for transfusions. The agreement was amended in
December 1996 and June 1998. The amended agreement (the "Platelet Agreement")
provides for Baxter and the Company to generally share system development costs
equally, subject to mutually agreed budgets established from time to time. The
June 1998
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amendment provides for the Company, beginning April 1, 1998, to fund $5.0
million that was previously to be funded by Baxter. The Platelet Agreement also
provides for a sharing of revenue from sales of inactivation system disposables
after each party is reimbursed for its cost of goods above a specified level.
Under the Platelet Agreement, the Company has received a $1.0 million equity
investment from Baxter and has recognized approximately $13.8 million in revenue
from Baxter, including $3.0 million in license fees, $2.5 million in milestone
payments and approximately $8.3 million in development funding. License fees and
payments for achieved milestones are non-refundable and are not subject to
future performance. Development funding is in the form of balancing payments
made between Baxter and the Company to adjust the relative spending of the
companies to the levels as agreed to by Baxter and the Company. The Platelet
Agreement provides for Baxter to make a $5.0 million cash milestone payment to
the Company upon the approval by the FDA of an application to market products
developed under the platelet program or comparable approval in Europe or upon
termination of the platelet system development program. The Company purchased an
additional 5.3% of the adjusted product revenue from future sales of the
platelet system disposables for an agreement to pay Baxter $8.3 million on June
30, 1999. The Company may defer payment for up to twelve months under certain
circumstances.
Agreement with Baxter for the development of pathogen inactivation systems for
red blood cells and FFP. In January and July 1995, the Company and Baxter
entered into interim funding agreements related to the development of pathogen
inactivation systems for plasma and red blood cells used for transfusions. In
April 1996, the Company entered into a development and commercialization
agreement with Baxter, principally focused on the development of plasma and red
blood cell pathogen inactivation systems. The agreement was amended in March
1998 and June 1998. The amended agreement (the "RBC/FFP Agreement") provides for
Baxter and the Company generally to share red blood cell system development
costs equally, subject to mutually agreed to budgets established from time to
time. The RBC/FFP Agreement also provides for a sharing of revenue from sales of
red blood cell inactivation system disposables after each party is reimbursed
for its cost of goods and a specified percentage allocation is retained by
Baxter for marketing and administrative expenses. Under the RBC/FFP Agreement,
the Company and Baxter equally funded the FFP program development through
December 31, 1997 after which time Baxter's funding commitment for the FFP
development program is limited to $1.2 million payable in equal installments in
January 1999 and January 2000. The RBC/FFP Agreement also provides for the
Company to receive 75% and Baxter to receive 25% of revenue from sales of FFP
inactivation system disposables after each party is reimbursed for its cost of
goods and a specified percentage allocation is retained by Baxter for marketing
and administrative expenses. Baxter will be responsible for manufacturing and
marketing the FFP product, and will retain its exclusive, worldwide distribution
license.
Under the RBC/FFP Agreement, the Company has received $14.0 million in equity
investments from Baxter and has recognized approximately $7.3 million in revenue
from Baxter to fund the development of the red blood cell and FFP systems.
Development funding is in the form of balancing payments made between Baxter and
the Company to adjust the relative spending of the companies to the levels
agreed to by Baxter and the Company and to reimburse each party for
fee-for-service development activities. The RBC/FFP Agreement also provides for
Baxter to make a $2.0 million equity investment in the Company's Common Stock,
subject to the achievement of a specified milestone. The milestone-based
investment is priced at 120% of the market price of the Company's Common Stock
at the time of the investment.
To date, the Company has not received any revenue from product sales, and it
will not derive revenue from product sales unless and until one or more of the
products under development receives regulatory approval and achieves market
acceptance. The Company anticipates that its sources of revenue until product
sales occur will be limited to payments under development and
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commercialization agreements with Baxter in the area of blood component pathogen
inactivation, payments from the United States government under research grant
programs, payments from future collaboration agreements, if any, and interest
income. Through June 30, 1998, the Company had recognized approximately $21.1
million in revenue under its agreements with Baxter, including the license fee
and milestone amounts described above, and approximately $3.4 million under
United States government grants.
RESULTS OF OPERATIONS
Revenue. Periodic development revenue is recognized by the Company from Baxter
when the Company's development costs exceed its contractual funding commitment
(relative to Baxter's). Development revenue earned under the agreements
decreased 50% to approximately $490,000 for the three month period ended June
30, 1998 from approximately $970,000 for the same period in 1997. This decrease
is primarily due to the Company's increased share of platelet system development
funding in 1998 and an increase in Baxter's development expenses relative to the
Company's development expenses. Development revenue increased 4% to
approximately $1.9 million for the six month period ended June 30, 1998 from
approximately $1.8 million for the same period in 1997. This increase is
primarily the net effect of an increase in the Company's costs associated with
the FFP and red blood cell pathogen inactivation systems relative to Baxter's
costs and an increase in the Company's share of platelet pathogen inactivation
system development costs (see Research and Development Expenses below).
Government grant revenue increased 10% to approximately $170,000 for the three
month period ended June 30, 1998 from approximately $150,000 for the same period
in 1997 and increased 15% for the six month period ended June 30, 1998 to
approximately $350,000 from approximately $310,000 for the same period in 1997,
primarily due to periodic changes in grant-related activity. In general,
grant-related activity is a function of how that activity fits into the overall
development activity at the Company and is not necessarily indicative of future
grant revenue. There can be no assurance that the Company will receive
additional government grants in the future.
Revenue under the agreements with Baxter was 78% of total revenue for the three
month period ended June 30, 1998, compared with 86% for the same period in 1997
and was 85% of total revenue for the six month period ended June 30, 1998,
compared with 86% for the same period in 1997.
Research and Development Expenses. Research and development expenses increased
176% to approximately $13.6 million for the three month period ended June 30,
1998 from approximately $4.9 million for the same period in 1997. Research and
development expenses increased 90% to approximately $18.1 million for the six
month period ended June 30, 1998 from approximately $9.5 million for the same
period in 1997. The increase was attributable to the following factors:
Purchase of Platelet Revenue Share. The Company and Baxter entered into
an agreement under which the Company will receive an additional 5.3% of
the sharable revenue under the December 1993 platelet agreement in
exchange for a payment to Baxter of $8.3 million on June 30, 1999. The
Company has accrued for this payment as a long-term payable at June 30,
1998 and recognized research and development expense for the same amount
as the platelet systems are in the development stage and there can be no
guarantee that revenue will be realized under the agreement.
Platelet Pathogen Inactivation System. The 1993 platelet agreement was
amended to provide for the Company, beginning April 1, 1998, to fund
$5.0 million that was previously to be funded by Baxter. Under this
amendment the Company recognized $1.9 million in research and
development expenses for the three and six month periods ended June 30,
1998. The Company's research and development expenses for the platelet
program decreased by approximately $170,000 for the three month period
ended
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June 30, 1998 compared to the same period of 1997. The decrease is due
principally to reduced toxicology and manufacturing costs, partially
offset by increased clinical trial costs. Research and development
expenses in the platelet program were approximately the same for the six
month period ended June 30, 1998 compared to the same period of 1997.
This is the net result of reduced toxicology and compound manufacturing
costs, partially offset by increased clinical trial costs. The Company
anticipates that research and development expenses will increase for the
platelet pathogen inactivation system as the Company initiates
large-scale clinical trials in the United States and Europe.
FFP Pathogen Inactivation Systems. Research and development expenses in
the FFP program were approximately the same for the three month period
ended June 30, 1998 compared to the same period of 1997. This is due
principally to reduced toxicology costs offset by increased clinical
trial costs. Research and development expenses in the FFP program
increased by approximately $450,000 in the six month period ended June
30, 1998 compared to the same period of 1997. The increase is due
principally to increased clinical trial costs. The Company's research
and development expenses will increase for the FFP pathogen inactivation
system as the Company fully funds development activities related the FFP
pathogen system beginning January 1, 1998, subject to Baxter's $1.2
million funding obligation in equal installments in January 1999 and
January 2000.
Red Blood Cell Pathogen Inactivation Systems. Research and development
expenses in the red blood cell program decreased by approximately
$130,000 for the three month period ended June 30, 1998 compared to the
same period of 1997. This decrease is principally due to a decrease in
compound manufacturing costs. Research and development expenses in the
red blood cell program increased by approximately $360,000 for the six
month period ended June 30, 1998 compared to the same period of 1997.
This increase is due principally to increased toxicology and clinical
trial costs partially offset by reduced compound manufacturing costs.
The Company anticipates that research and development expenses will
increase for the red blood cell pathogen inactivation system as the
Company increases its toxicology studies and initiates clinical trials.
The Company anticipates that research and development expenses will continue to
increase in the future as it expands its pathogen inactivation system
development efforts and related clinical trials.
General and Administrative Expenses. General and administrative expenses
increased 32% to approximately $1.1 million for the three month period ended
June 30, 1998 from approximately $810,000 for the same period in 1997 and
increased 34% to approximately $2.1 million for the six month period ended June
30, 1998 from approximately $1.6 million for the same period in 1997. These
increases are primarily attributable to increased personnel levels associated
with expansion of the Company's operations. The Company anticipates that general
and administrative expenses will continue to increase in the future as
additional personnel are added to support its operations.
Interest Income, Net. Interest income decreased 27% to approximately $270,000
for the three month period ended June 30, 1998 from approximately $370,000 for
the same period in 1997 and decreased 9% to approximately $560,000 for the six
month period ended June 30, 1998 from approximately $620,000 for the same period
in 1997. These decreases are due to higher average cash balances in the three
and six month periods ended June 30, 1997 resulting from proceeds from the
Company's initial public offering and the related private placement to Baxter
(see Liquidity and Capital Resources below). Interest expense remained
relatively unchanged from the three and the six month periods ended June 30,
1998 compared to the same periods in 1997.
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LIQUIDITY AND CAPITAL RESOURCES
In January 1997, the Company completed an initial public offering of 2,000,000
shares of Common Stock, generating net proceeds (after deduction of offering
costs) of approximately $21.1 million. Concurrent with this offering, the
Company sold directly to Baxter an additional 496,878 shares of its Common Stock
for an aggregate purchase price of approximately $5.5 million. In October 1997,
the Company completed a private placement of 217,202 shares of Common Stock to
Baxter for an aggregate purchase price of approximately $5.0 million. In
addition to these financings, the Company's sources of capital to date have
consisted of private placements of equity securities, development funding by
Baxter, United States government grants and interest income. To date, the
Company has not received any revenue from product sales, and it will not derive
revenue from product sales unless and until one or more planned products
receives regulatory approval and achieves market acceptance. At June 30, 1998,
the Company had cash, cash equivalents and short-term investments of
approximately $18.1 million.
Net cash used in operating activities was approximately $3.5 million for the six
months ended June 30, 1998, compared to $9.2 million for the same period in
1997. The use of cash primarily resulted from net losses of $17.2 million offset
by a reduction in development funding receivable from Baxter of $4.4 million and
an increase in amounts payable to Baxter of $8.3 million relating to the June
1998 amendment to the platelet agreement. Net cash used in investing activities
in the six month period ended June 30, 1998 of approximately $3.1 million
resulted principally from purchases of $12.6 million of short-term investments
offset by the maturities of $9.7 million of short-term investments and the
purchase of approximately $140,000 furniture, equipment and leasehold
improvements.
In June 1998, the Company and Baxter entered into a preferred stock purchase
agreement under which Baxter agreed to purchase 5,000 shares of Series A
Preferred Stock ("Series A") for an aggregate purchase price of $5.0 million. In
July 1998, Baxter purchased the Series A under the agreement. The Seres A will
convert to Cerus Common Stock upon marketing approval of the platelet program in
the United States or Europe or upon termination of the platelet system
development program. In the event of marketing approval, the Series A will
convert at 120% of market price at the time of conversion. In the event of
program termination, the Series A will convert at the market price at the time
of conversion. The Company has the right to redeem the Series A for $5.0 million
prior to conversion. In the event of a program termination, Baxter may require
the Company to redeem the Series A for $5.0 million.
In June 1998, the Company and Baxter also entered into a preferred stock
purchase agreement under which Baxter has agreed to purchase, at the Company's
option, up to $9.5 million Series B Preferred Stock ("Series B"). The agreement
provides that, provided the Company has not completed cumulative equity
financings with parties other than Baxter in excess of $20 million by
August 31, 1998, Baxter will purchase, upon the Company's request, up to $9.5
million of Series B during the period October 1, 1998 to September 30, 1999. The
purchases will be made at the Company's sole option and may be made in a single
tranche of $9.5 million or two tranches of $5.0 million and $4.5 million, also
at the Company's option. Each tranche becomes convertible to Cerus Common Stock
one year after the purchase of the Series B tranche at the market price at the
time of the purchase. Upon the Company's completion of cumulative equity
financings with parties other than Baxter in excess of $20 million, the Series B
will earn a premium of 7% per annum for a period not to exceed one year. The
Company has the right to redeem the Series B prior to conversion for a payment
to Baxter equal to purchase price.
In July 1998, the Company completed a private placement of 159,595 shares of
Common Stock to Baxter for an aggregate purchase price of approximately $3.0
million relating to the Company's achievement of a milestone under the RBC/FFP
Agreement.
The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including progress of the platelet, red blood
cell and FFP programs and the related clinical trials; achievement of
milestones; payments and equity investments by Baxter; regulatory approval and
successful commercialization of the Company's pathogen inactivation systems;
costs
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related to creating, maintaining and defending the Company's intellectual
property position; and competitive developments. The Company believes that its
available cash balances, together with anticipated cash flows from existing
Baxter and grant arrangements, will be sufficient to meet its capital
requirements for at least the next twelve months. There can be no assurance that
the Company will be able to meet its capital requirements for this or any other
period. In the event that additional capital is required, the Company may seek
to raise that capital through public or private equity or debt financings or
through additional collaborative arrangements or government grants. Future
capital funding transactions may result in dilution to investors in the Company.
There can be no assurance that such capital will be available on favorable
terms, if at all.
IMPACT OF THE YEAR 2000
Based on a recent assessment, the Company has determined that it will be
required to upgrade or replace a portion of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company estimates that costs associated with the upgrade and/or
conversion of existing computer software relating to the 2000 issue will be less
than $100,000. The Company is currently assessing the year 2000 compliance of
those companies on which the Company relies. There can be no assurance that
costs will not exceed the Company's estimate or that other companies on which
it relies will not experience year 2000 issues that have an adverse effect on
the Company's operations. If the Company is unable to upgrade its systems and
software for year 2000 compliance and/or if third parties on which the Company
relies are unable to operate fully due to a lack of year 2000 compliance, the
Company's operations may be materially adversely affected. The Company does not
currently have a contingency plan in the event that it is unable to make its
systems year 2000 compliant.
ADDITIONAL RISKS
The Company's business is subject to significant additional risks, including,
but not limited to, the risks and uncertainties inherent in its research and
development efforts, including preclinical and clinical trials; the lengthy,
expensive and uncertain regulatory process; dependence on Baxter and other third
parties; uncertainties associated both with obtaining and enforcing its patents
and with the patent rights of others; technological change and competition;
manufacturing uncertainties; and uncertainties regarding government reforms and
of product pricing and reimbursement levels.
The Company's pathogen inactivation systems are in the research and development
stage and will require significant additional preclinical and clinical testing
prior to submission of any regulatory application for commercial use. The
Company has not filed a product approval application with the United States Food
and Drug Administration ("FDA") or made corresponding regulatory filings in
Europe for its platelet pathogen inactivation system or for any of its other
planned products. No assurance can be given that such filings will be made or
that any of the Company's development programs will be successfully completed;
that any further Investigational New Drug ("IND") or Investigational Device
Exemption ("IDE") applications will become effective or that additional clinical
trials will be allowed by the FDA or other regulatory authorities; that future
clinical trials will commence as planned; that required United States or foreign
regulatory approvals will be obtained on a timely basis, if at all; or that any
products for which approval is obtained will be commercially successful.
In addition, the market price of the Company's Common Stock, like that of the
common stock of many other companies in similar industries, is likely to be
highly volatile. Factors such as the announcements of scientific achievements or
new products by the Company or its competitors; governmental regulation; health
care legislation; developments in patent or other proprietary rights of the
Company or its competitors, including litigation; fluctuations in the Company's
operating results; comments made by analysts, including changes in analysts'
estimates of the Company's
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financial performance; and market conditions for health care stocks in general
could have significant impact on the future price of the Common Stock. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations, which may be unrelated to the operating performance of
particular companies. There can be no assurance that fluctuations in the price
and volume of the Company's Common Stock will not occur in the future.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 8, 1998, the Company sold 5,000 shares of unregistered Preferred Stock
to Baxter Healthcare Corporation for an aggregate purchase price of $5.0
million. Such sale of Preferred Stock was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof, as a transaction not
involving any public offering.
On July 17, 1998, the Company sold 159,595 shares of unregistered Common Stock
to Baxter Healthcare Corporation for an aggregate purchase price of $3.0
million. Such sale of Common Stock was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof, as a transaction not
involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held and Annual Meeting of Stockholders on June 16, 1998.
The stockholders elected the Board's nominees as Class ______ directors
by the votes indicated:
Nominee Votes in Favor Votes Withheld
------- -------------- --------------
John E. Hearst, Ph.D., D.Sc., 7,884,107 6,296
Henry E. Stickney 7,885,943 4,460
The selection of Ernst & Young LLP as the Company's independent auditors
for the fiscal year ending December 31, 1998 was ratified with 7,881,150
votes in favor, 3,574 votes against and no abstentions.
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders must provide specified
information to the Company between March 17, 1999 and April 16, 1999 if such
matters are to be brought before the stockholders at the Company's 1999 annual
meeting of stockholders (unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended).
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, dated June 30, 1998, with
respect to changes in the terms of its relationship with Baxter
Healthcare Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CERUS CORPORATION
Date: August 14, 1998 /s/ Stephen T. Isaacs
--------------- --------------------------------------------
Stephen T. Isaacs
Chief Executive Officer
(Principal Financial and Accounting Officer)
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CERUS CORPORATION
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
No. Description Page
- ------ ---------- ------------
27.1 Financial Data Schedule --